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October 23, 2012

Is the Current Money System Due to Expire?

If history is a guide, it’s likely to give way to a new one soon, and gold should rise a few more years, bullion dealer says

The price of gold has plateaued following a third-quarter rally in which it skyrocketed over 12%, in anticipation of looser monetary policy from the U.S. Federal Reserve.

Indeed, the price of gold Tuesday is just dollars away from its $1,733 an ounce close on Sept. 13, the day the Fed launched its third round of quantitative easing.

As is ever the case in markets, opinion remains divided as to gold’s future direction.

Some say the onset of Hindu festivals in India, the world’s largest gold importer, will give gold a lift after an unusual period of weak demand caused by the strength of the rupee vis-à-vis the dollar this year. Others say a decline in Chinese imports along with weakening customer demand signal a cooling of the market for gold.

Yet London-based HSBC is now forecasting a gold rally it expects to last through the end of 2013, taking the price of gold up to $1,900 an ounce, based partly on renewed strength in the jewelry sector.

Meanwhile, a working paper by two IMF economists arguing for a new fiat-currency-based debt-repudiation plan continues to generate buzz, including a recent commentary by Ambrose Evans-Pritchard about the effects of legislating away bank-created money. What would that do for the price of gold and precious metals?

It would send prices considerably higher, according to Leigh Greenberg, a Los Angeles-based gold dealer who says that if history is a guide, our current money system is likely to give way to a new one.

In an interview with AdvisorOne, the principal of physical gold, silver, platinum and palladium business Universal Bullion says that money systems go through cycles lasting some 30 to 50 years.

Gold was used as money from the Civil War to World War I, a period lasting 46 years, he says. From the founding of the Federal Reserve system in 1913 to the end of World War II, a period lasting 31 years, paper notes were tied to gold through a fixed rate of exchange between the U.S. and foreign central banks.

Then came the Bretton Woods system, lasting 27 years, when international currencies were tied to the dollar through exchange rates while the dollar was backed by gold. The current system began in 1971 when President Nixon ended the convertibility of dollars to gold, and formerly fixed exchange rates become free floating.

That period has lasted 41 years, and contemporary monetary and fiscal challenges convince Greenberg that the current system will end by 2020.

“We’re due for a new money system,” he says. “It could be a basket of currencies, or three currencies—the euro, the dollar and an Asian currency—or something through the IMF.”

A crisis—indeed, the current crisis—will precipitate the change in money systems, Greenberg suggests.

“We have kicked the proverbial economic can down the road. At this moment in time the feeling is that the executive branch doesn’t have that much control over the finances of our economy,” he says.

The gold dealer fingers the government’s loose monetary policy specifically as the source of the dollar’s debasement.

“We’re inflating the currency supply, and as a result prices rise. People are losing confidence in the currency and they want something with intrinsic value.

“Look, the dollar worked yesterday, and today, and for our entire lives,” Greenberg adds. “But in our grandparents’ lives it didn’t work and in other parts of the world and at other times [currencies have failed]. At some point, we’ll wake up and it won’t work.”

He cites Nixon’s severing the dollar’s gold convertibility as the most recent example, when the government was “printing more money to pay for the Vietnam War in August of 1971. France was making noise about wanting gold, not our dollars,” so a new monetary system suited to a debased currency was instituted, Greenberg says.

Now, citing a litany of current troubles—the fiscal cliff, falling earnings, rising prices and a declining dollar among them—Greenberg thinks the system will buckle in some dramatic way.

“The stock market will drop 30 or 40 or 50%, paper [money] will be worthless, but gold and silver will [spike] in value.”

Greenberg expects the secular upswing in gold to last another three to eight years. The bullion dealer says these days he even has investors purchasing physical gold and silver for their IRA accounts.

"At some point it will peak, then you exit," he says. "When everyone’s going in, then get out and buy cash-flow real estate."